1. Which of the following ratios indicate high leverage for a corporation?a. High working capitalb. High current ratio2. Which of the following actions does not decrease working capital?a. Paying off long-term bonds three years before the maturity dateb. Declaring dividendc. Paying dividendd. Buying machinery for cash3. Which of the following are changed when a corporation buys equipment for cash?c. High gross margind. High debt-to-equity rationc. Current Assetsd. Shareholder's Equityа.Total Assetsb. Total Liabilities

The question is related to Ratio Analysis.

Answered: 1. Which of the following ratios…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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When a corporation invests borrowed money in assets that generate profits greater than the after-tax cost of the debt, it increases the return on equity for common shareholders. creates financial leverage. has a mix of debt and equity in its capital structure. does all of these options. If the effective rate of interest is greater than the contract rate, the bonds will sell at par. a premium. a discount. any of these choices, depending on other circumstances.
Taking the corporate taxes into account, if there is no possibility of financial distress, a firm can maximize its market value when the: firm uses a debt-equity ratio of 1.0. firm uses the maximum amount of debt in its capital structure. firm uses no debt in its capital structure. corporate tax rate approaches 100%.
15. Bankruptcy risk of a firm increases with the level of: Select one: a. Asset growth b. Profitability c. Revenue growth d. Debt financing
Which of the following will increase the WACC for a tax-paying company? Decrease the proportion of equity financing Decrease the proportion of debt financing Decrease the market value of the equity Increase the market value of the debt
TRUE OR FALSE: 1.A Financial Statement is not necessary for corporations over $10M in annual revenue. 2.It is possible to determine the future value (FV) of an investment deposit into fixed income security. 3. Investing in stock is a form of fixed income investing.
Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 7.9%, a debt cost of capital of 6.4%, a marginal corporate tax rate of 21%, and a debt-equity ratio of 2.7. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. a. What is Goodyear's WACC? The WACC is %. (Round to two decimal places.)
Which of the following would reduce a firm's WACC after tax? a. A firm invests in an average-risk project using equity, rather than debt financing. b. A supermarket chain decides to establish hardware stores which increases its systematic risk. c. A firm issues shares and uses the proceeds to pay off a bank loan. d. A firm issues bonds and uses the proceeds to repurchase stock. e. A firm significantly improves its operating cost control to boost profits.
Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.1%, a debt cost of capital of 6.6%, a marginal corporate tax rate of 22%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)
Why does the WACC decrease as a company begins to take on debt and then increase after a certain point?
Which statement is correct?a. The cost of debt is determined by taking the present value of the interest payments and principal times one minus the tax rate.b. The difference in computing the cost of capital between using the accumulated profits and issuance of new ordinary shares is the growth rate.c. Increase in flotation costs, increase in the company’s beta and increase in the expected inflation will all lead to d. increase the company’s weighted average cost of capital.e. Increasing the company’s dividend payout would mitigate the company’s need to raise new ordinary shares.f. none of the above

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